India Spectrum

*connectedthinking

Tax and Regulatory Services

Be in the know* July 2010

Vol. 3 Issue 7

Editorial

We are delighted to present

another issue of India Spectrum.

The high growth story of India

continues with a year-on-year growth

in the index of industrial production

with the month April, 2010 registering

its highest in last 20 years. The

advance tax payments in June quarter

by the top 100 companies based

in Mumbai, the financial capital of

India, have risen by about 20% over

previous year. The concern is that the

high spirit may diminish after May as

the base effect will reduce the index

of industrial production to a single

digit. Inflation numbers, correlating

with the growth, are unfailingly

high with the wholesale price index

accelerating faster than expected to

10.16% in May, 2010. The inflationary

pressures have shifted from food to

manufacturing products and it will

be difficult for the Reserve Bank of

India to halt the price rise without

affecting economic growth. Price

stability is going to be a high priority

for the government and the monetary

policy has a greater role in stabilising

expectations against the inflation.

On the global front, the crisis in

the European Union is far from

over. After Greece, the crisis in

the Euro-zone had spilled over

to Hungary. The European Union

is India’s largest trading partner

and any slowdown in European

economies can adversely hit India.

There have been notable

developments on the tax and

regulatory front. The much awaited

revised Discussion Paper on the

Direct Taxes Code, 2009 (“DTC”)

has been released for public debate

and comment. The Government

has given due consideration to

stakeholders’ concerns on key

areas including MAT, treaty override,

capital gains tax, grandfathering of

the Special Economic Zones (“SEZ”)

exemptions, residential status of

a foreign company and general

anti-avoidance rules, emanating

from the original DTC proposals.

However, there still remain areas of

concern in the draft DTC such as

the Controlled foreign corporation

rules, the sweeping general anti-

avoidance rule and the construct of

capital gains regime. The revised bill

is expected to be introduced in the

Parliament during the current month

after considering the responses to

the revised Discussion Paper.

In a key development in regulation

of capital markets, the Ministry

of Finance notified the Securities

Contracts (Regulation) (Amendment)

Rules, 2010, which mandates that

the minimum threshold of public

shareholding will be 25% for all

listed companies. Listed companies

with public shareholding below

this threshold will be required to

increase the public shareholding

by at least 5% p.a. beginning from

the date of commencement of the

Securities Contracts (Regulation)

(Amendment) Rules, 2010. Press

reports suggest that the Finance

Ministry has recommended general

permission for non-residents to set

up Limited Liability Partnerships

2

Contents

Do mail your feedback at pwctrs.knowledgemanagement@in.pwc.com and we shall be pleased to respond

Glossary

(“LLPs”) in all sectors that are open to foreign

direct investment. This would give a big fillip to

the foreign investors in the form of a cost efficient

alternative mode of investment in India.

There has been a spate of important decisions on

international taxation matters which have been

covered by PwC News alerts. A key decision is

the one in the case of Ashapura Minichem Ltd.

(Mumbai Tribunal), in which it is observed that the

twin condition test of rendering and utilisation of

services in India for a tax trigger in India no longer

Corporate Tax 1

Case Law 1

Notifications / Circulars 6

Personal Taxes 7

Case Law 7

Notifications / Circulars 8

Transfer Pricing 9

Indirect Taxes 13

VAT / Sales Tax 13

CENVAT 13

Service Tax 14

Customs / Foreign Trade Policy 14

Regulatory Developments 15

holds good in view of the retrospective amendment to

section 9 by the Finance Act, 2010. For access to the news

alert on this case, please visit http://www.pwc.com/in/en/

services/Tax/News_Alert/2010/PwC-NewsAlert-2010.jhtml.

We trust you will enjoy reading this India Spectrum. We

would, as always, very much appreciate your feedback.

Thank you

Ketan Dalal & Shyamal Mukherjee

Joint Leaders-TRS Practice

AE Associated Enterprise

ALP Arm’s Length Price

AY Assessment year

CBDT Central Board of Direct Taxes

CESTATCustoms, Excise and Service

Tax Appellate Tribunal

CIT Commissioner of Income-tax

CIT(A) Commissioner of Income-tax (Appeals)

CUP Comparable Uncontrolled Price

FDI Foreign Direct Investment

FMV Fair market value

FY Financial year

HC High Court

RBI Reserve Bank of India

SC Supreme Court

SEBI Securities and Exchange Board of India

The Act Income-tax Act, 1961

The Tribunal The Income-tax Appellate Tribunal

TNMM Transactional Net Margin Method

TO Tax officer

TPO Transfer Pricing Officer

1

India Spectrum*

Case Law

Assessment Proceedings

Information found through due

diligence does not amount to

true and full disclosure

The assessee had claimed various

items of expenditure exceeding INR

0.6 million, which were not strictly

related to the expenses incurred

during the relevant year. In the

return filed, there was no specific

mention about the year to which

these expenses were attributable,

and therefore, the Tax Officer

(“TO”), believing the expenditure

to be related to the relevant year,

allowed the claim. However, it was

later noticed that various items of

expenditure were for a prior period

and not related to the year; therefore,

the assessment was reopened under

section 147 of Income-tax Act, 1961

(“the Act”), disallowing the claim.

The High Court (“HC”) observed that

the assessee had nowhere stated in

the statement of accounts, balance

sheet, or profit and loss account, that

the expenditure claimed related to

prior periods. On the other hand, the

only disclosure made was in the notes

to accounts detailing the claim of prior

period expenses. This was not a true

and full disclosure in the accounts

which form Annexures to the return.

The TO could not have taken note of

the disclosure alleged to have been

made by the assessee by way of

notes to accounts. The HC was of

the view that the accounts did not

disclose that the expenditure debited

was not related to the previous year

and the note could not be termed as

true and full disclosure of material

facts. Furthermore, the explanation to

the section made it clear that what is

discernible or what the Officer could

have found out through due diligence

could not be said to be full and true

disclosure of the information required

for the assessment. As the Income-

tax Appellate Tribunal (“the Tribunal”)

did not examine the crystallisation

Corporate Tax

of liabilities and held that the

reopening of assessment was not

permissible beyond four years, the

case was remanded to the Tribunal

to decide whether liability was

crystallised only in the year entitling

the assessee to a deduction for the

assessment year (“AY”) in question.

CIT v. Skyline Builders [2010-TIOL-323-HC-KERALA-IT]

When the assessee has applied the

actual cost for valuing shares, tax

assessment cannot be rectified

The assessee sold certain shares and

computed capital gains in terms of

the provisions of section 48 of the Act

taking the actual cost of shares sold

as its cost of acquisition. It followed

Accounting Standard (“AS”) -13 and

had shown the average cost of shares

held in its books of account. The TO

rectified the order under section 154

of the Act and added the difference

between actual cost considered for

computation of capital gains and the

average cost of shares held on the

ground that the value of shares was

overstated in the balance sheet.

The HC held that the TO was

confused by the two systems in

operation. One was the manner in

which the assessee was keeping its

books of account in accordance with

AS-13 and the other was the manner

of computation of capital gains under

the Income-tax regime. The HC

upheld the Tribunal’s decision where

it was held that whether the average

cost of total shares held by the

assessee, or the actual cost of shares

sold should be taken into account, is

a matter which can be decided only

after due deliberation after examining

1

2

the facts and circumstances of

each case. Furthermore, it was not

a matter which could have been

rectified under section 154 of the

Act nor could any adjustment have

been made under section 143(1)

(a) of the Act. Accordingly, the HC

deleted the addition made by the TO.

CIT v. Ranbaxy Holdings Company

[2010-TIOL-330-HC-DEL-IT]

Business Expenditure

Advisory fees paid towards regulatory

compliance for the buy-back of

shares are revenue in nature

The assessee company paid INR

2.04 million as advisory fees towards

regulatory compliance in relation

to the buyback of its shares. The

assessee argued that the payment

was for maintaining good and

cordial relations and safeguarding

the interests of the existing

shareholders and hence was wholly

and exclusively for the assessee’s

business, and should be allowed

as revenue expenditure. However,

the TO disallowed the expense and

treated it as capital expenditure, since

it was directly related to the capital

of the assessee. The Commissioner

of Income-tax (Appeals) (“CIT(A)”)

also agreed with the TO and

rejected the assessee’s plea.

The Tribunal, however, differed with

the TO and the CIT(A), holding that

the expenditure was not in relation

to the share capital of the company.

The matter was brought before the

Delhi HC, which, based upon several

judgments of the Supreme Court

(“SC”), concurred with the Tribunal

that the assessee had not acquired

the benefit or addition of enduring

nature because of the buyback.

Consultancy fees paid in connection

with the buy-back of shares resulted

in a reduction in capital instead of an

increase . The expenditure incurred

had not resulted into bringing into

existence any asset. Furthermore,

the expenditure was for the benefit of

existing shareholders in the ordinary

course of business and was incurred

for the purpose of business, hence

was an allowable deduction.

CIT v. Selan Exploration Technology

Ltd. [2009] 188 Taxman 1 (Delhi)

Interest expenditure on

borrowed funds relating to

exempt income disallowed

The assessee, a limited company,

had a stake in several partnership

firms. During the AY 2004-05, the

assessee borrowed funds from banks

and advanced these to its group

partnership firms in which it was a

partner without charging any interest.

The HC disallowed the interest

expenditure on loans under section

14A(1) of the Act as the income

it earned from partnership firms

by way of its share of profits was

exempt under section 10(2A) of

the Act and that non-charging

of interest to the firms indirectly

increased the share of profits.

Reliance placed by the assessee

on the decision of SC in the case

of S.A. Builders Ltd. v. CIT and

Anr. [2007] 288 ITR 1 (SC) which

related to applicability of section

36(1)(iii) of the Act on interest-

free loans given out of borrowed

funds to subsidiary companies was

rejected as the facts were different.

CIT v. Popular Vehicle & Services Ltd.

[2009] 189 Taxman 14 (Kerala)

Capital Gains

Where tenancy rights in a

property are transferred, stamp

valuation provisions under

section 50C not applicable

The assessee, a tenant in a flat,

sold tenancy rights and offered

long-term capital gains computed

after considering actual sales

consideration. The TO held

that the consideration for the

transfer of tenancy rights would

be the value of the property

adopted by the sub-registrar for

the purpose of stamp duty. The

CIT(A) upheld the TO’s order.

The Tribunal held that the substitution

of stamp duty value as full value of

consideration for land or building or

both is under the deeming provisions

of section 50C of the Act, and it is

established in law that a legal fiction

cannot extend beyond the purpose

for which it is enacted. The Tribunal

held that section 50C does not apply

to all capital assets but only to land

or buildings. A tenancy right is neither

land nor a building. Therefore, section

50C of the Act had no application and

capital gains had to be computed on

the basis of the actual consideration

and not the stamp duty value.

Kishori Sharad Gaitonde v. ITO [2010-TIOL-297-ITAT-MUM]

Marginal difference in the value

of property to be ignored for

the purpose of section 50C

The assessee firm was engaged in the

construction business. The assessee

sold the basement of a building for

INR 1.9 million. The stamp valuation

authorities, however, adopted the

value of INR 2.87 million for the

purpose of stamp duty. The assessee

objected to the stamp duty valuation

proposed by the TO applying section

50C(1) of the Act. The TO referred the

matter to the Departmental Valuation

Officer (“DVO”) who estimated the

Fair market value (“FMV”) of the

3

India Spectrum*

properly at INR 2.055 million on the

date of sale. The TO substituted

the sale consideration with the

FMV determined by the DVO.

The difference between the sale

consideration shown by the

assessee and the FMV determined

by the DVO was INR 0.155 million,

which was less than 10 per cent.

Considering that valuation is a matter

of estimation where some difference

is bound to occur, the Tribunal held

that the TO was not justified in

substituting the sale consideration

and held that the addition made by

the TO could not be sustained.

Rahul Constructions v. Deputy Commissioner

of Income Tax [2010] 38 DTR 19 (Pune)

Stamp Duty valuation at a later

date cannot be substituted

as sale consideration

The assessee, along with other co-

owners, sold a part of their ancestral

agricultural land. They had received

an advance for the sale in December

2005 and a sale deed was registered

in February, 2007. The assessee

offered capital gains to tax in A.Y.

2006-07 on the transfer of assets

based on the terms of section 53A

of the Transfer of Property Act, 1882

after taking FMV as the actual sale

consideration. The TO estimated

the full value of consideration at an

amount higher than that offered by

the assessee and made additions

to the total income. The CIT(A)

increased the addition by taking sale

consideration at the new stamp duty

valuation amount made applicable

by the state government from April,

2008 on the basis of market rates

prevailing during 2005 and 2006.

Furthermore, the FMV determined by

the assessee based on a valuation

report obtained from an approved

valuer was not accepted by the TO.

The Tribunal held that section 50C of

the Act was applicable for determining

the full value of consideration for the

purposes of computation of capital

gains. Furthermore, there was no

evidence on record to show that the

assessee had received consideration

over and above what was recorded in

the sale agreement, and accordingly,

the addition was to be deleted.

Regarding the cost of acquisition

to be adopted on 1 April, 1981, the

Tribunal held that the value adopted

by the assessee, based on a technical

report of a registered valuer approved

by the Department, was acceptable.

Kaushik Sureshbhai Reshamwala v. ITO

[2010] 5 taxmann.com 15 (Ahd. – ITAT)

Chargeability of surplus arising

from sale of shares by an assessee

dealing in shares and maintaining

a separate investment portfolio

The assessee company was dealing in

shares, both as stock-in-trade as well

as investment, and was maintaining

separate accounts for both the

portfolios. The assessee claimed

income from sale of shares and

securities as long-term capital gains

(“LTCG”). However, according to the

TO, the income derived by assessee

from share dealing was business

income. The CIT(A) confirmed the TO’s

view. The issue before the Tribunal was

whether the assessee was engaged

in the business of dealing in shares

and whether gains shown as LTCG

were actually business income.

To determine whether the transactions

undertaken were in the nature of trade

or merely for investment purposes,

the Tribunal referred to certain criteria,

including the intention of the assessee

at the time of purchase of shares,

treatment given to such purchases in

the books of account, whether shares

were purchased out of borrowed

funds (since normally money is

borrowed for the purchase of goods

for the purpose of trade and not for

investment), frequency of purchase

and sale, the purpose of purchases

made i.e. for realising profits or for

retention and appreciation in value,

the method of valuation followed

in the balance sheet at year-end,

authorisation in the constitutional

documents, bifurcation of securities

followed by the assessee, etc.

The Tribunal observed that the

assessee had maintained separate

accounts, valuation was done at

cost for the investment portfolio,

the frequency of transactions was

not large enough, the turnover-to-

stock ratio in the investment portfolio

was very low and that the board of

directors had passed resolutions for

making investments, whereas the

memorandum of the association

only authorised them to trade in

shares. Thus, the Tribunal held

that the surplus was chargeable to

capital gains only and the assessee

was not to be treated as a trader

in respect of sale and purchase of

shares in the investment portfolio.

Sarnath Infrastructure Ltd. v. Assistant Commissioner

of Income Tax [2010] 124 ITD 71 (Lucknow)

Capital gains tax on distribution

of assets on dissolution

of a partnership firm

The assessee, a partnership firm, was

engaged in the business of execution

of civil contracts, running of computer

education centres and execution of

real estate projects. The partners of

the firm through a Memorandum of

Understanding (“MOU”), decided

to transfer the business of running

of computer education centres and

execution of real estate projects

into a new partnership firm.

Corporate Tax

4

As per the MOU, a new partnership

with same name was formed and

the assets and liabilities of the above

businesses as existing in the books as

on 31 March, 2002 were transferred

to the new firm w.e.f. 1 April, 2002.

The TO invoked the provisions of

section 45(4) of the Act on the ground

that there has been distribution of

assets on dissolution of the firm

and computed long-term capital

gains based on the FMV of assets.

The Tribunal observed that:

The MOU was prepared in

lieu of dissolution deed

The assets and liabilities were

divided between group of partners

Both groups were permitted

to either induct new partners

or to retire old partners

A consolidated amount, said

to be a gift, was paid to the

partners of other group.

Thus, it was held that the firm

was dissolved and capital gains

arose on such distribution of

assets, liable to tax in the year

in which assets were distributed

among the group of partners.

ACIT v. G H Reddy [2008] 120 TTJ 89 (Chennai)

Loss on sale of capital assets

prior to amalgamation

The assessee, Oral B Laboratories

(called GDOPL after amalgamation)

filed its return of income for AY 2000-

01 declaring long-term capital loss

from sale of shares of its two group

companies, WSIL and GDOPL, on

30 December, 1999. The assessee

amalgamated with one such Group

company GDOPL w.e.f. 1 January,

2000. The TO disallowed the capital

loss by holding that these shares

were bought out of funds borrowed

from other group companies and sale

transactions were entered on the same

date immediately prior to amalgamation

merely to create capital loss and was

a colourable device for tax avoidance.

The CIT(A) partly allowed the loss

arising on sale of shares of WSIL.

However, the Tribunal allowed the entire

loss on shares of WSIL and GDOPL on

the grounds that the transaction was

similar to the sale of shares of WSIL

and the assessee had not taken any

unfair tax benefit from such capital loss

as it already had unabsorbed capital

losses. The contention of the assessee

that shares were sold to discharge the

loans payable to group companies

a few days before amalgamation

was accepted by the Tribunal.

The HC upheld the Tribunal’s decision

that it is for the assessee and not

for the revenue to decide when to

sell shares and it is not illegal to

sell shares at fair values to a group

company to reduce book liabilities.

The HC also held that as no tax

benefit was obtained by the assessee

even after two years of losses, the

transaction cannot be considered

as a tax avoidance device.

CIT v. Gillette Diversified Operations Pvt.

Ltd. [2010-TIOL-396-HC-DEL-IT]

Chargeability of Income

Advance received would be taxable

in the year in which service is

rendered and not in the year of receipt

under cash system of accounting

The assessee, engaged in the

business of trading and agency

business in textile machinery

accessories, investment and

financing, was following the cash

system of accounting and had

filed its return of income without

offering advance received as

income. The TO made the addition

of the advance received by the

assessee towards service charges.

The Tribunal observed that in terms

of section 4 of the Act, income of the

previous year was subject to charges

of income tax. Only the receipt of

the amount was not taxable unless

the receipt partakes the character of

income. In this regard, reliance was

placed on the decision of the SC in

the case of Sassoon & Co. Ltd. v.

CIT [1954] 26 ITR 27 (SC) where it

was held that income can be said

to accrue only when the assessee

acquires the right to receive that

income. Furthermore, irrespective of

method of accounting, what is taxable

is the income and not the whole

amount. Unless the assessee can

exercise his rights over a particular

receipt it could not be said that the

income had accrued. Accordingly, it

was held that the advance amount

would be taxable in the year in

which services were rendered.

ATE Enterprises Pvt. Ltd. v. ITO [2010-TIOL-246-ITAT-MUM]

Deductions

Deduction under section 80-IB(10)

for slum rehabilitation scheme

The assessee undertook to carry

out a slum rehabilitation project, for

which Mumbai Metropolitan Region

Development Authority was to give

the benefit of Transfer of Development

Rights (“TDR”). A part of the housing

project was commercial in nature.

After the completion of the project,

the TDR was received and sold

for a profit. The assessee followed

the project completion method of

accounting, declared this income

in the return of income filed and

claimed a deduction under section

80-IB(10) of the Act for AY 2006-07.

The Finance Act, 2004 included a

clause in section 80IB(10) of the Act

5

India Spectrum*

limiting the quantum of commercial

space in housing projects to 5 per

cent of the built-up area, or 2000

sq.ft., whichever is less. The revenue

based on the amended law stated

that the assessee did not comply with

the above condition and was thus not

eligible for the deduction. The issue

in appeal was whether the assessee

was required to fulfill the conditions

set out in A.Y 2004-05 i.e. whether the

law established when the assessee

commenced the development or

the law as amended retrospectively

w.e.f 1 April, 2005 would apply.

The Tribunal observed that section

80-IB(10) of the Act did not define

a housing project. The CBDT had

earlier clarified that any project which

is approved by a local authority

as a housing project should be

considered adequate for the purpose

of section 80-IB(10) of the Act.

Furthermore, the fact the housing

project had a commercial space

in it was not sufficient to conclude

that it was not a housing project.

Also, it was held that the law

when the assessee commenced

development was to be applied,

and a subsequent retrospective

amendment could not deny the

benefit of deduction to the assessee.

It was also held that where projects

are approved as housing projects

by the local authority, such an

approval is sufficient for the purpose

of qualification as housing project.

Hiranandani Akruti JV v. DCIT [ITA

NO. 5416/MUM/2009]

Penalty

Where all the material facts are

disclosed, penalty could not be levied

The TO had levied a penalty under

section 271(1)(c) of the Act on

the additions to the total income

for AY 2001-02, (a) on account of

disallowance of expenses under

section 40(a)(i) of the Act claimed

in respect of payment made to

AT&T, Singapore (b) disallowance

of expenses paid to increase the

authorised capital, and (c) amount

received from Birla, AT&T.

The assessee had contended that

the expenses were credited on

31 March, 2001 to the account of

AT&T Singapore. The assessee

had deducted tax at source at the

rate of 10% and paid the tax in

November 2001. In terms of section

40(a)(i) if the Act, it stood prior to 1

April, 2003, if tax was deducted, no

disallowance could be made. The

Tribunal held that the proposition,

that the entry passed in the account

books about withholding tax was

sufficient to comply the provisions

of section 40(a)(i) of the Act as it

stood prior to 1 April, 2003, was

a matter of interpretation of the

provisions of the Act. Merely because

a certain claim was disallowed by

invoking the deeming provisions

contained in section 40(a)(i) of the

Act, it could not be said that the

assessee’s claim of deduction was

false when a categorical finding

was given by the Tribunal that the

liability had crystallised during the

year under consideration itself.

Therefore, the assessee’s claim

was not false or mala fide. The

assessee had not failed to disclose

true material facts relevant to the

deduction claimed by the assessee.

As regards item (b) the Tribunal held

that an identical claim was made in

an earlier financial year (“FY”) which,

though not admissible, was allowed

by the TO, due to an oversight or for

any other reason. Therefore, the claim

so made by the assessee cannot be

a basis to hold that the assessee has

made a false claim by concealing

the particulars of the matter. As

regards item (c), the Tribunal deleted

penalty considering that in quantum

proceedings issue was set aside

to the TO. Hence, the assessee

was held to be not liable to penalty

under section 271(1)(c) of the Act.

AT&T Communication Services India Pvt.

Ltd. v. DCIT [2010-TIOL-250-ITAT-DEL]

Royalty / Fees for Technical Services

Payment for value added

services partly taxable as

fees for technical services

The assessee, a partnership

firm engaged in the business of

manufacturing and export of cut

and polished diamonds, was a sight

holder of De Beers Trading Company

(“DTC”) London. It had applied for

nil withholding tax certificate under

section 195 of the Act in respect of

payment to DTC for value added

services (“VAS”) like procurement

of rough diamonds without any

interruption ensuring the quality and

quantity of diamonds and verification

of diamond suppliers’ credentials,

etc. The TO rejected the application

and treated the service as fees

for technical service (“FTS”) liable

to be taxed at 15 per cent on the

ground that the services relating

to procuring the right quality and

quantity of material for manufacturing

was also a technical service.

Before the CIT(A), the assessee

contended that certain services

provided by DTC were a sort of

assurance, or in the nature of market

information, and were not covered by

article 13 of the India-UK tax treaty.

The CIT(A) observed that DTC

provided core services and growth

services and the assessee could

Corporate Tax

6

not utilise growth services without

making payment for VAS. Thus,

DTC indirectly charged for growth

services by passing own commercial

experience to the assessee. Also,

the assessee was allowed to use

the intranet owned by DTC and

maintain its own “My DTC Area” in the

intranet. This amounted to allowing

the assessee to use the commercial

scientific equipment i.e. the intranet

and the server of DTC. The CIT(A)

held that 50 per cent of the VAS

payment was towards royalty and FTS

and balance was towards business

receipt, not taxable in the absence

of a permanent establishment.

On appeal by revenue, the Tribunal

upheld the order of the CIT(A) in

the absence of any distinguishable

features brought on record against

the findings of the CIT(A).

DDIT v. M/s. Navin Gems [2010-TII-47-ITAT-MUM-INTL]

Speculative Transaction

Transaction in derivatives can

be speculative transactions if

not for bona fide hedging

The assessee was dealing in shares

and securities. In AY 2005-06, they

claimed a loss on account of Nifty

hedging transactions as business

loss. However, the TO considered it

a speculation loss, not a business

loss, on the grounds that a derivative

transactions could be regarded as a

hedging transactions under section

43(5)(b) of the Act only to the extent

that the inventory of shares held by

the assessee and excess would be

regarded as a speculative transaction.

On the date the Nifty Futures were

purchased, the inventory of shares

held by the assessee was less than

the value of the futures, hence the

loss was treated as a speculation

loss to the extent of the difference.

The CIT(A) allowed the appeal on the

ground that section 43(5)(d) of the

Act (inserted by Finance Act 2005),

stipulating that derivatives were not

speculative transactions, and the

insertion was clarificatory in nature.

On an appeal by the Revenue, the

Tribunal reversed the CIT(A)’s order

and held the loss to be speculative

to the extent of the excess of the

assessee’s position in the forward

market over actual stock in the ready

market, on the following grounds:

the amendment to section

43(5)(d) of the Act was neither

clarificatory nor retrospective

in operation. Consequently,

derivatives can be considered non-

speculative under section 43(5)

(b) of the Act only to the extent

they are for hedging purposes;

Circular No. 23D dated 12

September, 1960 clarified that

bona fide hedging transactions

shall not be regarded as

speculative, provided that the

value and volume of hedging

transactions are in equal

proportion, hedging transactions

are never in excess, and hedging

transactions are in respect of the

same scrips held by the assessee;

However, in Nifty futures and

index futures there cannot be any

identification of shares and tally

with the inventory of shares held.

ACIT v. Shri Dinesh K. Mehta [ITA No. 976/MUM/2009]

MAT

Adjustment to book profit as per

audited accounts not permissible

except as specified in section 115JB

The assessee was in the business of

trading and manufacturing of gasoline

engine management systems. It had

paid commission to its sole selling

agents which was disallowed by the

TO while computing taxable income

under normal provisions of the

Act. The Commissioner of Income-

tax (“CIT”) invoked the provisions

of section 263 of the Act, on the

ground that the TO had not added

the disallowed sales commission

while computing the book profit

under section 115JB of the Act.

The HC by relying on the decision

in the case of Apollo Tyres Ltd.

v. CIT [2002] 255 ITR 273 (SC),

held that once the profit and loss

account was audited and certified

by the statutory auditors to be in

accordance with the Companies Act,

1956, the TO did not have powers

to go beyond the profit so declared

except as per the Explanation to

section 115JB of the Act, and hence,

the action of the CIT under section

263 of the Act was not proper.

CIT v. Denso Haryana Pvt. Ltd. [2010-TIOL-339-HC-DEL-IT]

Notification / Circular

Widening of existing road regarded

as new infrastructure facility

The Central Board of Direct

Taxes (“CBDT”) vide Circular

no. 4/2010 has clarified that

widening of an existing road by

constructing additional lanes as

a part of a highway project by an

undertaking would be regarded

as a new infrastructure facility

for the purposes of section

80IA(4)(i) of the Act. However,

simply relaying of an existing

road would not be classifiable

as a new infrastructure facility.

CBDT Circular no. 4/2010, dated 18 May, 2010

7

India Spectrum*

Case laws

Capital Gains

The entire cost of acquisition can

be claimed as a deduction in case

the assessee is considered as the

absolute owner of the property

for capital gains tax purposes

In a recent ruling, the Delhi HC

held that the entire indexed cost

of acquisition would be reduced

to calculate capital gains even in

cases where only a proportionate

amount of consideration was

received in lieu of the property.

In this case, the assessee was a

non-resident Indian and a Swiss

National. He purchased a property

in the name of his niece in March

1994 for a consideration of INR

14.9 million. The entire amount was

financed by Vaishali International

and Management Resources Ltd.

(“VIMAR”), in which the appellant

was holding 97% shares and his

niece was holding 3% shares.

Thereafter, the appellant gave a

gift amounting to INR 1446.25

million to his niece. She utilised

this amount for repayment of the

loan to VIMAR. Subsequently, his

niece entered into a collaboration

agreement for development of the

property and agreement to sell

this property with Dear Farms Pvt.

Ltd. An agreement dispute arose

between the assessee and his niece

after the development-cum-sale

agreement. Subsequently, upon

being asked to vacate the property,

which was in the possession of the

appellant, he filed a suit requesting

a permanent injunction and seeking

to restrain his niece from leasing

out the property or dispossessing

them from this property. He also

sought a decree cancelling the sale

deed by which the property was

purchased in the name of the niece

contending that he was the real owner

of the property. This appeal was

decided in favour of the assessee.

Subsequently, the dispute was settled

between the parties. The developer

paid a sum of INR 15760 million as a

total consideration for the property.

The appellant was paid INR 40 million

out of the total consideration.

This receipt was treated as capital

gain by the TO. The assessee

contended that he was not the

owner of the said property and the

sum of INR 40 million was received

by the assessee for handing over

the possession of the property and

hence no capital gains arose. He

also contended that this amount was

not received by him against transfer

of any capital asset as defined in

section 2(14) of the Act and thus

was not taxable as capital gains. The

TO did not accept this contention

and computed the capital gains by

giving proportionate deduction of

the indexed cost of acquisition. The

CIT(A) and the Tribunal also accepted

the decision of the TO. The HC held

Personal Taxes

Even if a proportionate amount of

consideration was received in lieu of

the property, entire cost of acquisition

is to be considered for capital gains

8

that capital gains did arise in this

transaction, however, the assessee

should be allowed to deduct the

entire indexed cost of acquisition of

the property. The HC further held that

once the assessee is treated as the

absolute owner of the property and

the entire amount of INR 40 million

was offered to tax as capital gains,

the claim of deduction of the entire

cost of acquisition should be allowed.

SM Wahi v. DIT and Anr. [2010-TII-10-HC-DEL-NRI]

Penalty

The word “tax” does not

include penalty

The assessee was a director in a

company and had signed its audited

accounts for the period ended 30

June, 1988. The assessee resigned as

a director on 14 October, 1989. A tax

demand was raised on the company

for AY 1990-91. Since the dues could

not be recovered from the company,

the TO initiated proceedings against

the assessee under section 179 of

the Act and attached the residential

flat of the assessee. The assessee

made representation before the TO

and pointed out that the decision

of the company to convert the

investment into stock in trade, as

a result of which tax demand had

arisen, was taken after his resignation

from the company as a director.

The TO rejected the contention of

the assessee and held him liable for

tax and penalty. The assessee filed

a writ petition and contended that

the tax due does not mean penalty

under the provisions of the Act. The

assessee also contended that the tax

liability accrued after his resignation.

The HC held that the expressions

tax due and such tax under section

179 of the Act would mean tax

as defined under section 2(43) of

the Act. Thus, tax due would not

being within its ambit a penalty that

may be imposed on the company.

Furthermore, the decision in the case

of UOI v. Manik Dattatreya Lotlihar

[1988] 172 ITR 1 (Bom), where it was

held that the expression tax for the

purpose of section 179 of the Act,

includes penalty, did not reflect the

correct position in law in view of

the decision in the case of Harshad

Shantilal Mehta v. Custodian [1988]

231 ITR 871 (SC). Accordingly, a

penalty could not be recovered

from the director in case recovery

cannot be made from the company.

Dinesh T Tailor v. TRO [2010-TIOL-311-HC-MUM-IT]

Notifications / Circulars

New TDS rules notified

The CBDT has amended the rules

relating to tax deduction at source

(“TDS”) by issuing Income-Tax (6th

Amendment) Rules, 2010. The new

TDS rules are effective from 1 April,

2010. Some of the salient features

of these rules affecting TDS on

salary payments are as follows:

The due date for deposit of TDS

on salary payments made in

the month of March has been

extended to 30 April (earlier

the due date was 7 April).

The time limit for issuance of TDS

certificates has been extended

till 31 May following the close of

the FY (earlier the TDS certificates

were required to be issued by 30

April after the close of the FY).

The due date for filing quarterly

TDS statements for the last quarter

of the FY under the new rules

has been changed to 15 May

(earlier due date was 15 June).

The format of TDS certificates

[form no. 16 and 16A] has

also been amended.

Notification No. 41/ 2010 dated 31 May, 2010

Monetary limit for gratuity enhanced

The Payment of Gratuity Act, 1972

has been amended to increase

the monetary limit of gratuity

payable to employees from INR

0.35 million to INR 1 million. The

amended provisions are applicable

with effect from 24 May, 2010.

The CBDT has also made

corresponding amendment by

enhancing the maximum limit of

gratuity exempt from tax from INR

0.35 million to INR 1 million in sub-

clause (iii) of clause (10) of section

10 of the Act by notification No.

43 / 2010. This notification would

be applicable to employees who

retire, or become incapacitated

before retirement, or expire, or

whose services are terminated,

on or after the 24 May, 2010.

[The Payment of Gratuity (Amendment) Act, 2010

(No. 15 of 2010)] and [Notification No.43/2010;

F.No.200/33/2009-ITA.I] No.402/92/2006-MC

(30 of 2010), Government of India / Ministry of

Finance, Department of Revenue, CBDT

9

India Spectrum*

There have been a flurry of Tribunal

Rulings during May/June 2010 that

have been summarised in the current

issue of Spectrum. All the rulings have

tended to emphasise the importance

of factual analysis as a basis for

making adjustments in the process

of determination of comparables.

The Mumbai Tribunal adjudicated

on the imposition of a penalty on

upward adjustment of an Arm’s

Length Price (“ALP”), ruling in favour

of the taxpayer. The Discussion Draft

of the Direct Taxes Code contains

proposals such as the introduction

of Controlled Foreign Corporation

legislation (“CFC”), which will have

consequences on Indian companies

with an outbound presence.

Hourly rates published by

NASSCOM can be used as

CUP for ITES companies

The assessee provided voice based

ITES to its associated enterprises

(“AEs”). The assessee had adopted

the Comparable Uncontrolled Price

(“CUP”) method (industry hourly

rates published by the National

Association of Software and Service

Companies (“NASSCOM”) for its

customer care business process

outsourcing segment) to benchmark

its international transactions and

corroborated the hourly rates

with an external agency report.

However, the Transfer Pricing Officer

(“TPO”) rejected the CUP method

and applied the Transactional Net

Margin Method (“TNMM”), thereby

proposing an upward adjustment to

the income of the assessee, which

was also confirmed by the TO.

The Tribunal rejected the appeal of

the Revenue for the following reasons:

Transfer Pricing

The range of rates in the

NASSCOM report is specific to

the Customer Care Business

Process Outsourcing (“BPO”) and

this is the segment in which the

assessee’s business fell. Therefore,

the rate given by NASSCOM

was specific and not general.

The billing rate per hour of

the assessee was in line with

the man-hour rate prevalent

in the industry and can be

verified from documentation

submitted by the assessee.

The TPO had selected data of

companies which functioned in

an entirely different segment and

which were uncomparable with the

assessee’s case and hence the

adjustment could not be adopted.

Editor’s Note: However, we

understand from NASSCOM that the

association does not publish hourly

rates that have been referred to in

the Tribunal’s order. NASSCOM’s

Strategic Review of 2005 gives

only a generic reference to such

pricing indicators. The reference

to the NASSCOM report seems to

suggest that it is the content of the

Strategic Review which was used

as a supporting argument, this

was accepted by the Tribunal.

DCIT v. 3 Global Services Pvt. Ltd.

[2010] 6 ITATINDIA 228 (Mum)

Hourly rates published by NASSCOM

can be used as CUP for ITES

companies

10

TNMM requires comparison of net

profit margins realised by an enterprise

from an international transaction or an

aggregate of a class of international

transactions and not comparing the

operating margins of enterprise

The assessee was engaged in

manufacturing and export of cut and

polished diamonds. The assessee

adopted the Cost Plus Method

(“CPM”) to benchmark its international

transactions of sales and purchases.

The TPO rejected the CPM adopted

by the assessee and applied TNMM

proposing an adjustment to the

income of the assessee. The CIT(A)

concluded that the adjustment was

not necessary, as the computed price

was within the range of +/- 5%.

On appeal, the Tribunal,

ruled as follows:

The assessee had adopted the

CPM for computing the ALP of the

international transactions. The TPO

held that CPM was not the most

appropriate method, and this was

not challenged by the assessee;

The Tribunal relied on the decision

in the case of UCB India Pvt.

Ltd. v. ACIT [2009] 314 ITR 292

(Mumbai) where it was held that

the TNMM refers to only net profit

margin realised by an enterprise

from an international transaction

or a class of such transactions,

but not operational margins

of enterprises as a whole.

The Tribunal set aside the matter

for fresh adjudication de novo.

ACIT v. M/s Twinkle Diamond [2010-TII-09-ITAT-Mum-TP]

No addition on account of interest

on outstanding balance

The assessee, a branch office of a

non-resident foreign company based

in the Netherlands, was engaged

in the trading and distribution of

medical consumables and equipment.

The goods were procured from

other entities of the group as well

and sold directly to institutions

or to distributors and stockists.

The assessee was responsible for

marketing all the products of its

group entity in the SAARC countries

of India, Bangladesh, Nepal and

Sri Lanka. During the year under

appeal, the group entity sold goods

directly to hospitals in India. The

assessee undertook marketing efforts

in India to promote the products

of its group entity. It accordingly

received commission on direct sales

for the marketing efforts. However,

the TO proposed an addition to

the income of the assessee on the

grounds that the assessee had failed

to charge interest in respect of the

outstanding amount of commission

and marketing support income in

excess of a period of 130 days.

The Tribunal supported the findings of

the CIT(A) and ruled in favour of the

assessee for the following reasons:

The receipt of commission on

direct sales formed an integral

part of the assessee’s business

of distribution of products.

As per the distribution agreement,

the transaction of receipt

of marketing support and

commission on direct sales was

closely inter-linked to the business

of purchase and sale of the group

entity’s products. Hence, the TO

erred in concluding that these

transactions could be separated.

The distributorship agreement

did not mention any

provision of interest on any

outstanding payments.

The TO wrongly concluded that

the receipt of marketing support

payment and commission

on direct sales needed to be

separately examined devoid

of the relationship with the

liability of the assessee for the

payment of purchases made

by it from its group entity.

Boston Scientific International BV v.

ADIT [2010-TII-16-ITAT-MUM-TP]

Assessee’s Transfer Pricing

study cannot be rejected lightly,

“comparables” have to be

comparable on all parameters, no

incentive to shift profits offshore

if tax rates there are higher

The assessee was engaged in the

manufacturing and export of plain and

studded jewellery of gold, platinum,

silver and other precious / semi-

precious diamonds and synthetic

stones in the form of ornaments.

The company’s products were

exported mainly to the US and the

UK. The assessee adopted TNMM

to benchmark its international

transactions. However, the TPO

rejected the data submitted and

the benchmarking analysis of the

assessee and introduced 18 new

comparables, and accordingly,

proposed an adjustment to the

income of the assessee.

The Tribunal upheld the order of the

TNMM requires comparison of net

profit margins as against operating

margins

11

India Spectrum*

CIT(A) ruling in favour of the assessee,

and dismissed the appeal filed by the

revenue on the following grounds:

The TPO failed to establish any

valid reasons for rejecting the

search process and comparables

selected by the assessee.

The TPO had not considered the

entire jewellery manufacturing

industry to arrive at a more

meaningful comparability.

The TPO failed to consider

the Function, Assets and

Risks (“FAR”) analysis of the

various comparables, before

declaring them as comparables

to the assessee’s case.

The comparables selected by

the TPO were mainly situated in

the Santacruz Electronics Export

Processing Zone (“SEEPZ”) area

where companies enjoy various

fiscal advantages apart from the

income tax benefits meaning

their profit margins were higher

than that of the assessee.

The tax rates were higher in the US

in comparison to India, and hence

there was no intention or incentive

to transfer profits to a higher tax

jurisdiction / region, as the assessee

in India enjoyed a deduction under

section 80HHC of the Act.

DCIT Mumbai v. M/s. Indo American

Jewellery [ITA No. 6194/Mum/2008]

Upholding the need for accurate

adjustment for material

transactional differences while

applying the CUP Method

The taxpayer was engaged in the

manufacturing and trading of animal

healthcare and veterinary products.

The assessee imported raw materials

and consumables from its AEs and

manufactured products for sale in

domestic and international markets.

During the relevant year, the assessee

had exported identical products to

a third party in Vietnam and to an

AE in Thailand. The assessee used

the TNMM to demonstrate the arm’s

length nature of the transactions.

The TPO rejected the TNMM and

considered CUP as the most

appropriate method on the grounds

that identical products were sold

to AEs and third parties. The TPO

allowed the assessee adjustments

on account of the transactional

differences like difference in volume

of sales, difference in credit risk

and difference in credit period,

thereby recomputing the ALP of the

exports made to the AEs at a higher

amount. The CIT(A) upheld the use

of the CUP method, but granted a

marginal relief to the assessee by

increasing the adjustment factors

considered by the TPO with respect

to volume and credit differences.

Before the Tribunal, the assessee

submitted that Thailand (where the

AE was situated) had totally different

market conditions compared to

Vietnam (where the third parties

were situated). The needs for

the veterinary products in the

two markets were different since

Thailand was dominated by poultry

and Vietnam was dominated by

pigs. The market sizes and level

of competition were also different.

The assessee demonstrated

that the final selling price to third

parties in the two countries were

different. The Tribunal held that

Reasonably accurate adjustments

are to be made to eliminate

material differences affecting

price, costs or profit arising

from such transactions.

The disparate economic and

market conditions of the two

countries would need to be

adjusted for and mere geographic

contiguity of two countries need

not mean similarity in economic

and market conditions.

The Tribunal remanded the case

back to the CIT(A) with a direction

to make adjustments for the

geographical differences.

Argued by PwC Tax Litigation Team

Intervet India Pvt. Ltd. v. ACIT [2010-TII-16-ITAT-MUM-TP]

Cherry-picking approach of the

TPO held to be unjustified

The taxpayer was engaged in the

provision of representative and

marketing services to its AEs.

The company had benchmarked

its transactions using the TNMM.

During the assessment proceedings,

the TPO selected four different

companies (which were rejected by

the assessee) on a random basis on

the grounds that these companies

had better margins than the assessee

and thereby proceeded to make an

upward adjustment of 5% to the

operating margin of the assessee.

The Tribunal, after taking on

record the contentions of both

the parties, ruled that:

The TPO was unjustified in

rejecting the arm’s length analysis

carried out by the assessee.

The random selection of four

Transfer Pricing

Cherry-picking approach of the TPO

cannot be justified

12

comparables by the TPO, without

giving consideration to the reasons

for their rejection as submitted by

the assessee, amounted to cherry-

picking, which was against the

fundamentals of transfer pricing.

The average net margin of the

four comparables selected

by the TPO was in fact lower

than that of the assessee.

The benefit of 5% variation as per

the proviso to section 92C of the

Act was not provided by the TPO.

Accordingly, the Tribunal held

that the addition made by the

TPO was arbitrary and not in

accordance with the law.

ACIT v. Toshiba India Pvt. Ltd. [2010-TII-14-ITAT-DEL-TP]

Bona fide difference of opinion

in selection and application

of transfer pricing method

would not attract liability

The assessee selected and applied

TNMM for determination of the ALP.

However, the TPO selected and

applied the CUP method as the most

appropriate method and recomputed

the ALP and made a transfer pricing

adjustment for the differential arising

on account of use of the CUP

method instead of TNMM. The TO

considered the addition and levied

a penalty holding that the assessee

had furnished inaccurate particulars

and had therefore concealed income.

On appeal, the Tribunal upheld the

order of the CIT(A) and ruled that

the difference between the revenue

and the assessee in selecting and

applying a transfer pricing method

constituted a bona fide difference

of opinion and did not amount to

furnishing inaccurate particulars with

the intent of concealing income. In

its ruling, the Tribunal also placed

reliance on the SC judgment in the

case of CIT v. Reliance Petroproducts

Pvt. Ltd. [2010] 322 ITR 158 (SC). As

a result, the Tribunal held that there

was no case for penalty proceedings

to be initiated against the tax payer.

ACIT v. Firmenich Aromatics (India) Pvt.

Ltd.[2010-TII-17-ITAT-MUM-TP]

Selection of comparables to be made

after detailed analysis, the benefit

of 5% as per the proviso to section

92C(2) available only when more

than one price is determined and

adjustment to ALP only on the basis

of firm calculation and back-up data

The assessee was a captive software

development service provider to its

parent company in United Kingdom.

The software was developed on

the basis of the requirements of the

parent company’s customers, to

whom the assessee also provided

after sales service in relation to the

software. The assessee was being

remunerated on the basis of man-

day rates. The TPO in the absence

of any documentation supporting the

determination of the ALP, concluded

that TNMM was the most appropriate

method, selected 20 comparables,

thereby proposing an adjustment

to the income of the assessee. The

CIT(A) rejected 15 companies and

concluded that only 5 were valid

comparables. However, the CIT(A)

neither allowed any adjustment

nor did he allow the benefit of 5%

provided in section 92C(2) of the Act.

The Tribunal, on analysis

of the case, held that:

The companies held as

comparables by both the TPO and

the CIT(A) were not comparables

on account of various factors such

as differences in functionality,

business models, markets being

catered to, domains being served,

etc. Only one company was finally

selected as a comparable.

With regard to the working

capital adjustment claimed by

the assessee, it was held that

the funds received in advance

without stipulation of interest may

have an impact on the net profit

margin, for which an adjustment

may be appropriate. Accordingly,

the matter was restored back to

the TO to consider and decide.

The adjustment on account of

risk was not feasible without an

examination of the contractual

terms of the relevant transactions,

which lay down explicitly

or implicitly the division of

responsibilities, risks, and benefits,

between the parties to the

contract. Furthermore, the claim

for an adjustment on account

of research and development,

made in an ad hoc manner

without any back-up data or a

firm calculation was disregarded.

The benefit of 5% provided in

the proviso to section 92C(2)

of the Act was denied on the

grounds that the proviso was

applicable only when more than

one price was determined by the

appropriate method, which was

not the case for the assessee, as

the ALP was determined on the

basis of a single comparable.

ACIT v. Vedaris Technologies Pvt .Ltd.

[2010-TII-10-ITAT-DEL-TP]

13

India Spectrum*

VAT / Sales Tax

Case Law

Transfer from principal to consignment

agent not leviable to VAT based

on advance ruling unless coupled

with transfer of property in goods

The Delhi HC has held that it is not

permissible to levy and collect VAT

merely on the strength of an Advance

Ruling issued by the Commissioner

where the transaction does not

constitute a sale within the meaning

of the Act. The Court observed that

the Commissioner, by way of an

advance ruling, cannot classify every

supply of goods by the principal

to its consignment agent as sales

unless such a transfer is coupled with

transfer of property in the goods.

Havell’s India Ltd. v. Commissioner

of VAT [2010] VIL 24

Battery chargers supplied with

mobile phones liable to higher

rate of VAT as accessories

The Punjab VAT Tribunal has held

that a battery charger supplied with

a mobile phone is an accessory

and not a part of the mobile phone.

Consequently, the battery chargers

are liable to VAT at residuary rate of

12.50% and not @ 4% as applicable

to mobile phones and parts.

Nokia India Pvt. Ltd. v. State of Punjab [2010] 36 PHT 55

Notifications / Circulars

Various tax amendments

notified in Maharashtra

The State Government has notified

the following amendments in the

VAT Act w.e.f. 1 May, 2010:

Increase in the turnover limit

for VAT audit from INR 4

million to INR 6 million.

Introduction of Composition

scheme for registered dealers

engaged in construction

of flats, dwellings, etc.

Enhancement in penalty

amounts w.r.t. specified non-

compliances under the Act.

Indirect Taxes

Reduction in VAT rate from 12.5%

to 5% for vehicles operated

on battery or solar power

Notification No. VAT/AMD-1010/1A/ADM-6 dated 17 May, 2010:

The Maharashtra Tax Laws (Levy and Amendment) Act, 2010]

CENVAT

Case Law

Mere fact that an intermediate

product was dispatched outside

for job work would not establish

marketability of such a product

The SC has held that in the absence

of any other evidence, the fact that

an intermediate product has been

sent outside for some job work to

be carried out thereon does not

establish the marketability of the

product and it is hence not excisable.

Bata India Ltd. v. CCE [2010] 252 ELT 492(SC)

No one-to-one correlation is required

for usage of inputs for export

goods and exporter is entitled to

refund of unutilised credit of inputs

accumulated from time to time

The Bangalore Customs, Excise,

and Service Tax Appellate Tribunal

(“CESTAT”) has held that one-to-

one correlation is not required for

usage of inputs in export goods and

the exporter is hence entitled to a

refund of unutilised credit on inputs.

CCE v. Motherson Sumi Electric Wires

[2010] 252 ELT 543 (Bang.)

Notifications / Circulars

Amendment to provide for mandatory

electronic filing of periodic ER-2, ER4,

ER-5 and ER-6 returns/documents

14

The relevant provisions have been

amended to provide mandatory

electronic filing of periodic ER-

2, ER4, ER-5 and ER-6 returns/

documents by the manufacturers.

The procedure prescribed in Circular

919/09/2010 dated 23 March,

2010 for electronic filing of monthly

ER-1 would be mutadis-mutandis

applicable for the above change

CBEC Circular No 921/11/2010-CX dated 10 May, 2010

Service Tax

Case Law

Trading activity is neither a service nor

manufacture and accordingly input

service taxes pertaining to such activity

should be segregated and excluded

from availment of CENVAT credit

The Ahmedabad CESTAT has held

that trading activity is neither a service

nor manufacture, and an assessee

providing taxable services and

carrying out trading activity should

identify the input services related to

trading and not avail credit of service

taxes in relation thereto and only

avail the balance CENVAT credits.

Orion Appliances Ltd. v. CST [2010-TIOL-752-CESTAT-AHM]

Credit availed on GTA services received

for inward transportation need not be

reversed on the removal of goods

The Delhi CESTAT has held that at the

time of removal of inputs, the credit

availed on input services (inward

transportation) would not be liable

to be reversed unlike the reversal

of credit availed on these inputs.

AR Casting (P) Ltd. v. CCE & ST [2010] 25 STT 244 (Delhi)

Notifications / Circulars

Clarifications issued with regard

to availment of CENVAT credit in

cases of transactions between

associated enterprises and partial

payment towards input services

The Central Government has issued

the following clarifications regarding the

timing of availment of CENVAT credit

in case of associated enterprises:

the service recipient can avail the

CENVAT credit at the time when the

consideration has been adjusted

through any mode including debit

or credit entries in the books of

account and the service tax has

been paid to the Government; and

where an invoice is underpaid on

account of applicable discount

or for any other reason, CENVAT

credit may be availed to the extent

of the service tax paid by the

recipient, whether proportionately

reduced or otherwise.

CBEC Circular No. 122/3/2010–ST dated 30 April, 2010

Customs / Foreign Trade Policy

Case Law

For the purpose of classification,

survey report used for determining the

price to be paid to the supplier not to

be relied upon by the Department

The Chennai CESTAT has held that

for the purpose of classification

the Department cannot rely solely

on the survey report which was

used for determining the price to

be paid to the supplier. In case

of doubt, the Department should

carry out a chemical test

Tamil Nadu Newsprint & Papers Ltd. v.

CC [2010] 253 ELT 153 (Chennai)

Duty drawback allowed to

exporter cannot be recovered

if the export proceeds received

within the extended time allowed

by the Reserve Bank of India

The Delhi HC has held that no recovery

of duty drawback paid to an exporter

can be made in cases the exporter

realizes the sale proceeds within the

extended period approved by the RBI.

Birinder Kaur Bajwa v. Director (Drawback) Department

of Revenue [2010-TIOL-340- HC-Del-Cus]

Notifications / Circulars

Notice streamlining the procedure

for refund of 4% ADC issued by the

Customs Authorities at Mumbai

The Mumbai Customs has issued

a public notice detailing the

procedures to be followed for the

issue of a certificate / duplicate

copy of a bill of entry, where the

importer’s copy has been lost /

misplaced / destroyed / damaged.

Notice No. 49/2010 dated 26 April, 2010

Central Government extends

benefit of preferential tariff

rates to certain countries

The Central Government has extended

the benefit of preferential tariff rates

to Republic of Somalia, Maldives,

Bangladesh and Republic of Burundi

by including these countries in the

list of least developed countries.

(Customs Notifications No. 63/2010, dated 13

May, 2010 and 64/2010 dated 14 May, 2010

Development Commissioners of

SEZ directed to ensure also the

clearance of import and export

cargo on holidays as well

The Central Government has

directed the Development

Commissioners of SEZ to put in

place a mechanism for import and

export cargo on holidays as well

SEZ Instruction No. 53 dated 29 April, 2010

15

India Spectrum*

Regulatory Developments

Foreign Direct Investment

Discussion paper on ‘Foreign Direct

Investment in the Defence Sector’

The Department of Industrial

Policy and Promotion (“DIPP”)

has released a discussion paper

proposing an increase in the

Foreign Direct Investment (“FDI”)

limit in the Indian defence sector

from the existing limit of 26% to

either 74% or 100%. Views and

suggestions are invited on this

matter and other issues related to

the defence sector by 31 July, 2010.

As defence is a sensitive and a strategic

sector, views of the Defence Ministry will

be critical in shaping the future policy.

Foreign Exchange

Release of foreign exchange

for visits abroad

Currently, Authorised Dealers (“ADs”)

and Full Fledged Money Changers

(“FMCs”) are permitted to sell foreign

exchange in the form of foreign

currency notes and coins up to USD

2,000 to the travellers proceeding

to countries other than Iraq, Libya,

Islamic Republic of Iran, Russian

Federation and other Republic of

Commonwealth of Independent States.

This limit has been increased to USD

3,000. The limit for ADs and FMCs to

sell foreign exchange in the form of

foreign currency notes and coins to

the travellers proceeding to Iraq, Libya,

the Islamic Republic of Iran, Russian

Federation and other Republics of

Commonwealth of Independent

States remains unchanged.

Circular No.50 (RBI/2009-10/446/A.P.

(DIR Series) dated 4 May, 2010)

Financial Sector

Disclosure of investor complaints

with respect to Mutual Funds

Based on feedback from Investors

and Investors’ Associations to improve

transparency in grievance redressal

mechanism, the SEBI has instructed

the Mutual Funds to disclose details

of investor complaints received

by them on their websites, on The

Association of Mutual Funds in India

website and in its Annual Reports

(in the format specified by SEBI in

this circular). The details are to be

vetted and are required to be signed

by the Trustees of the Mutual Fund.

SEBI Circular - Cir/IMD/DF/2/2010 dated 13 May, 2010

SEBI (Credit Rating Agencies)

(Amendment) Regulations, 2010

The revised regulations provide that

if a credit rating agency proposes to

change its status or constitution, it

should obtain prior approval of SEBI.

In this regard, the terms change of

status or constitution and change

in control have been specifically

defined in the revised regulations.

SEBI Circular - CIR/MIRSD/CRA/7/2010 dated 13 May, 2010

SEBI (Certification of Associated

Persons in the Securities

Markets) Regulations, 2007

With effect from 1 June, 2010,

distributors, agents or any persons

employed or engaged or to be

employed or engaged in the sale

and / or distribution of mutual fund

products are required to have a valid

certification from the National Institute

of Securities Markets by passing the

requisite certification examination.

SEBI Circular - CIR/MRD/DP/19/2010

dated 10 June, 2010

IRDA Press Release

The Foreign Exchange Department

of the RBI, in Circular No. RBI/2009-

16

10/445 A.P. (DIR Series) Circular No.

49 dated May 4, 2010, has notified

a change in pricing guidelines

of equity shares, compulsorily

convertible preference shares and

compulsorily convertible debentures

(Equity instruments) to be issued /

transferred to a resident outside India.

The Insurance Regulatory and

Development Authority (“IRDA”) in a

press release, has clarified that since

these guidelines are applicable to

Indian companies in sectors other than

the financial sector, the provisions of

the said circular continue to not be

applicable to the Insurance sector.

IRDA Press Release Dated June 16, 2010

Capital Markets / SEBI

Amendment to Minimum Public

Shareholding requirement

for Listed Companies

The Securities Contracts (Regulation)

Rules, 1957 amongst other thing

provides for certain requirements which

public companies need to comply for

the purpose of getting their securities

listed on any stock exchange. One

requirement is to ensure the availability

of a minimum portion / number of

shares (floating stock) of the listed

securities to the public so that there

is a reasonable depth in the market

and the prices of the securities are

not susceptible to manipulation.

The Government enacted the

Securities Contracts (Regulation)

(Amendment) Rules, 2010 on 4 June,

2010 which states that all listed

companies are now required to offer

and maintain a minimum public

shareholding of 25% (as compared

to the earlier requirement of 10%).

Securities Contracts (Regulation) (Amendment) Rules, 2010

Easy access to annual reports

of listed companies

All Stock Exchanges have been

advised that the Annual Reports

submitted by companies pursuant

to the equity listing agreement from

the FY 2009-10 onwards should be

made available on their websites.

This is pursuant to the discontinuation

of the Electronic Data Information

Filing and Retrieval System (“EDIFAR”)

website which was an automated

system for filing, retrieval and

dissemination of corporate information.

SEBI Circular - Cir/CFD/DCR/5/2010, dated 7 May, 2010

Model SME Equity Listing

Agreement - conditions of listing

In a notification issued in April

2010, SEBI amended the SEBI

(Issue of Capital and Disclosure

Requirements) Regulations, 2009

by inserting a Chapter on Issue of

specified securities by Small and

Medium Enterprises (“SMEs”).

In continuation of the same and to

facilitate listing of specified securities

in the SME exchange, SEBI has

specified the Model Equity Listing

Agreement to be executed between

the issuer and the Stock Exchange.

Furthermore, SEBI has, inter alia,

provided for certain relaxations

to the issuers whose securities

are listed on SME exchange.

SEBI Circular - CIR/CFD/DIL/6/2010 dated 17 May, 2010

Setting up of a Stock Exchange

/ a trading platform for SME

SEBI has decided to make certain

changes to the framework for

recognition and supervision of the

SME exchanges / platforms (initially

prescribed on 5 November, 2008).

The circular provides for various

conditions which need to be fulfilled

for a company desirous of being

recognised as an SME exchange.

In this regard, one may note the

following important conditions:

The applicant is a corporatised

and demutualised entity;

It has a balance sheet net worth

of at least INR 1 billion;

The applicant has an online

surveillance capability;

The minimum lot size for trading

on the stock exchange shall be

INR one hundred thousand.

The SME platform can be

operationalised only after obtaining

prior approval of SEBI.

SEBI Circular - CIR/MRD/DSA/17/2010 dated 18 May, 2010

Voting rights of ADR / GDR holders

In November 2009, Securities and

Exchange Board of India (“SEBI”)

amended the Takeover Code to

provide that if American Deposit

Receipts (“ADR”) / Global Depository

Receipts (“GDR”) holders are entitled

to exercise voting rights on the shares

underlying ADRs / GDRs by virtue of

clauses in the depository agreement

or otherwise, open offer obligations

shall trigger, if the threshold limits are

crossed, on the issue of ADRs / GDRs.

Subsequently, while analysing the

terms of issue of recent ADR / GDR

issues, SEBI noted that, in certain

cases, the rights to give instructions to

custodian bank for exercising voting

rights are vested with the Board of

Directors of the issuer company,

while in other cases, it vested with

Depository receipt (“DR”) holder, and

no uniform practice is being followed.

Therefore, SEBI has now proposed

that issuers may be restricted to

17

India Spectrum*

Regulatory Developments

incorporate clauses that curtail

voting right of DR holders and

which empower management to

exercise voting rights on DRs. This

would imply that if the proposal is

implemented, going forward, only

DR holders shall have voting rights.

However, since provisions relating

to issue of ADR / GDR are within

administrative control of the Ministry of

Finance / Reserve Bank of India (“RBI”),

therefore, the same may need to be

implemented through appropriate policy

instructions by the Government, for

which SEBI has sent its recommendation.

SEBI - Agenda of Board meeting dated 19 May, 2010

Disclosure in Draft Red Herring

Prospectus (“DRHP”) from the

directors of Issuer Company with

regard to their directorship in

suspended / de-listed companies

Companies that wish to be listed on

a stock exchange are required to

enter into a listing agreement with

the respective stock exchanges,

which requires various disclosure and

compliances from the company. The

exchanges monitor compliance with the

provisions of the listing agreement and

penal action is taken against defaulting

companies, which also includes

suspension / delisting of securities.

Once trading in the scrip is

suspended or a company is

compulsorily delisted, the

investors have no exit option

available for these scrips and they

continue to hold illiquid scrips

for a prolonged period of time

Presently, there is no requirement of

disclosures from the directors of the

issuer company with regard to their

directorship in suspended / de-listed

companies. If such disclosures are

contained in the offer document, it

would help investors in assessing

the track record of directors.

Therefore it is proposed to incorporate

a clause requiring disclosure by the

management of past and current

directorship in listed companies

whose shares have been suspended

from trading at Bombay Stock

Exchange / National Stock Exchange

or de-listed from stock exchanges.

SEBI - Agenda of Board meeting dated 19 May, 2010

Others

The Employees’ State Insurance

(Amendment) Bill, 2009

The Parliament has passed the

Employees’ State Insurance

(Amendment) Bill, 2009.

The salient features of the

amendments are as follows:

Age limit of the dependants

is enhanced from 18 to 25.

Benefits are extended to

apprentices covered by standing

orders and trainees whose training

is extended to misuse exemption

granted to apprentices from the

provisions of the Employees

State Insurance Act, 1948.

Definition of “factory” is amended

to cover all factories, whether

running with or without power,

employing 10 or more persons.

The Employees State Insurance

Corporation, Director General

(“DG-ESIC”) has been made

Chairman of the Medical Benefit

Council to improve quality

of the medical benefits.

An added benefit to workers

for accidents which happen

while commuting to the place

of work and vice versa.

Medical treatment extended

to employees retiring under a

Voluntary Retirement Scheme

or who take early retirement.

Exemption to be granted only

to factories / establishments if

their employees get substantially

similar or superior benefits.

Extended medical care to non-

insured persons against payment

of user charges to facilitate

providing medical care to Below

Poverty Line families (“BPL

families”) and other unorganised

sector workers covered under the

Rashtriya Swasthya Bima Yojana.

PIB Release (Ministry of Labour and

Employment) dated 6 May, 2010

Introduction of trading in

carbon credit futures

The National Commodity & Derivatives

Exchange Ltd and the Multi Commodity

Exchange of India Ltd. have introduced

trading in carbon credits futures.

PIB Release (Ministry of Environment

and Forests) dated 30 May 2010

Medical Council (Amendment)

Ordinance, 2010

The government has taken control

of India’s medical regulatory body

(“MCI”) by passing Medical Council

(Amendment) Ordinance, 2010 to

amend the Indian Medical Council

Act, 1956 in view of the allegations of

corruption and malpractice in the MCI,

The Central Government has been

accorded powers to supersede

the Council and to constitute

a Board of Governors whose

functions have been defined.

The Central Government has been

accorded power to give directions

on questions of policy, other

than those relating to technical

and administrative matters.

18

Ahmedabad

President Plaza, 1st Floor,

Plot No. 36, Opp Muktidham Derasar

Thaltej Cross Road, SG Highway

Ahmedabad, Gujarat - 380054,

Phone +91-79 3091 7000

Bangalore

6th Floor, Millenia Tower ‘D’

1 & 2, Murphy Road, Ulsoor

Bangalore - 560 008

Phone +91-80 4079 6000

Bhubaneshwar

IDCOL House, Sardar Patel Bhawan

Block III, Ground Floor, Unit 2

Bhubaneswar - 751 009

Phone +91-674-2532 459, 2530 370

Chennai

PwC Center, 2nd Floor

32, Khader Nawaz Khan Road

Nungambakkam

Chennai - 600 006

Phone +91-44 4228 5000

Hyderabad

# 8-2-293/82/A/1131A

Road no. 36, Jubilee Hills

Hyderabad - 500 034

Andhra Pradesh

Phone +91-40 6624 6600

Kolkata

South City Pinnacle,

4th Floor, Plot – XI/1,

Block EP, Sector V

Salt Lake Electronic Complex

Bidhan Nagar

Kolkata 700 091

Phone +91-33 44046000 / 44048225

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice.

You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or

warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent

permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the

consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it. Without prior permission of PricewaterhouseCoopers, this publication may not be quoted in whole or in part or otherwise referred

to in any documents.

© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers”, a registered trademark, refers to PricewaterhouseCoopers

Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited,

each of which is a separate and independent legal entity.

pwc.com/india

Mumbai

PwC House, Plot 18/A, Guru

Nanak Road (Station road),

Bandra (W), Mumbai - 400 050

Phone +91-22 6689 1000

New Delhi / Gurgaon

Building No. 10, Tower - C

17th and 18th Floor,

DLF Cyber City, Gurgaon

Haryana - 122002

Phone +91-124-3306000

Pune

GF-02, Tower C,

Panchshil Tech Park,

Don Bosco School Road,

Yerwada, Pune - 411 006

Phone +91-20 41004444